Keysight Technologies Inc.

Good day ladies and gentlemen and welcome to the Keysight Technologies fiscal second quarter 2020 earnings conference call. My name is Robert and I will be your lead operator for today. After the presentation we will conduct a question and answer session. If you'd like to ask a question please press star followed by the number one on your telephone keypad. To withdraw your question please press the pound sign. If at any time During the conference, you need to reach an operator. Please press star followed by zero. Please note today's conference is being recorded today, Tuesday, May 26, 2020, at 1.30 p.m. Pacific Time. I would now like to hand the conference over to Jason Carey, Vice President, Treasurer, and Investor Relations. Please go ahead, Mr. Carey.

Thank you, and welcome, everyone, to Keysight's second quarter earnings conference call for fiscal year 2020. Joining me are Ron Nersessian, Keysight's Chairman, President, and CEO, and Neil Doherty, Keysight's Senior Vice President and CFO. Joining us in the Q&A session will be Mark Wallace, Senior Vice President of Worldwide Sales, and Satish Dhanashakaran, President of the Communications Solutions Group. You can find the press release and information to supplement today's discussion on our website at investor.keysight.com. While there, please click on the link for quarterly reports under the Financial Information tab. There you will find an investor presentation along with Keysight segment results. Following this conference call, we will post a copy of the prepared remarks to the website. Today's comments by Ron and Neil will refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. We will make forward-looking statements about the financial performance of the company on today's call. These statements are subject to risks and uncertainties and only valid as of today. The company assumes no obligation to update them. Please review the company's recent SEC filings for a more complete picture of our risks and other factors. Lastly, I would note that management is scheduled to participate in upcoming virtual investor conferences in June hosted by Baird, Bank of America, and Stiefel. And now I will turn the call over to Ron.

Thank you, Jason, and thank you all for joining us. First and foremost, we hope that you're all staying safe and well, and our thoughts are with everyone affected by the coronavirus pandemic. The world has faced unprecedented challenges over the past several months, and I would like to thank all of our employees for their continued dedication and commitment to Keysight, our customers, and our partners. Our execution and results this quarter underscore the power of our balance sheet, business model, and our Keysight leadership model, which drives our unique high performance culture and guides our company to continuously delivering greater value to customers, shareholders, and employees. I'll focus my formal comments today on three key headlines for the quarter. First, The health and safety of our employees is our top priority. After acting quickly to temporarily close most of our global locations in mid-March and implementing risk mitigation measures in response to the pandemic, we are now reopening sites and our production capacity is ramping rapidly. Second, despite the mandatory government shutdown of our production facilities and resulting supply disruption impact on our Q2 revenue, Keysight delivered steady orders, strong operating margin, and record-free cash flow. Our results demonstrated the exceptional resilience of our business and the durability of our financial operating model. And third, despite the near-term uncertainty, we are confident in our differentiated market leadership position, the strength of our operating model, and the long-term secular growth trends across our diverse set of end markets. Turning to the dynamics that impacted second quarter results, demand was steady across markets in February. As the impact of the pandemic expanded beyond China in early March, we responded quickly to limit the spread of the coronavirus and mitigate the risk to employees, customers, and suppliers, while also responding to local government directives. On March 18th, we issued a press release to announce the temporary closure of most locations around the world, including our production and order fulfillment facilities, which were fully closed for two weeks in March and had limited activity in April. We also took the necessary steps to deliver on our customer commitments, particularly those that provide essential services and support the communities in which we operate around the world. Working with local governments and health officials to implement health and safety measures at all of our locations, we are pleased to announce that we are reopening sites worldwide. Despite ongoing broader industry supply chain challenges, we are ramping our Keysight production and services operation and expect to be back to 100% capacity by the end of the third quarter. Now let's take a deeper look into our financial results. Order growth was positive through March, followed by a decline in April to finish the quarter down only 3% compared to last year's record second quarter. While we don't typically comment on calendar quarter performance, given the dynamic nature of the situation, it's worth noting that Keysight's orders and revenues both grew mid-single digits in the January through March timeframe. Despite lower-than-expected revenue as a result of supply chain disruptions, The resilience of Keysight's business model was exceptional and our flexible cost structure performed as expected. As a result of our immediate actions to reduce costs and preserve liquidity, we delivered operating margin of 19%, record free cash flow of $275 million, and a record cash balance of $1.8 billion. Our second quarter revenue declined 18% year over year as both segments of the business were impacted by the limited manufacturing capacity. However, we continue to see steady demand across several end markets with ongoing investment in next generation technologies such as 5G, 400 gig, and advanced semiconductor node processes. Other markets such as general electronics and automotive are expected to be more challenged in the near term. In commercial communications, our ongoing 5G order momentum resulted in a new record. Our end-to-end solutions portfolio continues to gain strong global customer adoption and is enabling the commercial 5G launches underway. We are further solidifying our global leadership position across both the wireless and wired 5G ecosystem through close collaborations with market leaders, leadership and standards, and first to market 5G design and test solutions. This quarter, we introduce Keysight's new 5G core network test solution called LoadCore. The 5G core testing software simulates complex real-world subscriber models. This enables mobile operators and network equipment manufacturers to qualify performance and reliability of voice and data transferred over 5G networks. This solution leverages from the Ixia and Prisma acquisitions to deliver testing capability needed by our customers. We also announced the collaboration with Rakuten, an operator in Japan, to enable their 5G deployments using our solutions for test, validation, and optimization of devices and networks. Keysight comprehensive solutions portfolio spanning the entire ecosystem, is a key differentiator in the market. In aerospace defense and government, order growth was driven by strong demand in the U.S., which was partially offset by lower international investment. Our solutions for electromagnetic spectrum operations, radar, space, and satellite continue to benefit from a favorable U.S. spending environment and ongoing investments in technology modernizations. Despite the substantial challenges in the automotive sector, next-generation electric and autonomous vehicle technology is a strategic priority for our customers. Keysight continues to invest to be first to market with solutions and remains highly engaged with key market players. For example, we recently announced the use of our Scion Lab battery test solution in the BMW Group's new battery cell competence center in Germany. Foundry customers are continuing to prioritize investment in advanced process node technologies and incremental infrastructure. This resulted in revenue growth for our semiconductor measurement solutions where we had less supply chain disruption. Software and services continue to contribute to the differentiation of our solutions and recurring revenue base. While growing above the company average over time, they are strengthening the durability and diversity of our business model. In Q2, the combination of both software and services represented approximately 35% of revenue. Turning back to the current COVID-19 pandemic, we are committed to supporting our customers and our communities through this challenge. For our customers, we launched an Innovate Anywhere program to enable IT teams to support remote users, ensuring VPN performance and security. We also implemented various health and safety measures at our facilities to ensure all safeguards are met before production and other operations resume. For our communities, we are contributing to the relief efforts globally through monetary and supply donations. These include donations of personal protective equipment to local hospitals and government agencies, providing support to children, families, and the most vulnerable. We are also making direct financial contributions to local communities and global nonprofit organizations. Before turning the call over to Neil, I'll close with a few key points. Keysight is a market leader in large, diverse, and growing end markets and serves a diversified global base of over 32,000 customers across multiple industries. The challenges of this pandemic are unprecedented, and I'm proud on how our team has responded. Our execution demonstrates the durability of our business and the resilience of our business model with 19% operating margin and solid cash flow, even with a Q2 revenue impact. We continue our significant investment in R&D and remain focused on first-to-market solutions. Our sales teams remain highly engaged with our customers and we continue to execute our strategy for long-term above-market growth. While we expect ongoing COVID-19 demand and supply chain headwinds over the next few quarters, our long-term secular market growth trends and the strength of our operating model remain intact. We expect to come through this challenge stronger than ever. Now I will turn it over to Neil to discuss our financial performance and the outlook in more detail.